Fund flows required to keep SET Index above PER of 15 times
June 23, 2014 00:00 By Therdsak Thaveeteeratham
The central bank's Monetary Policy Committee (MPC) left the benchmark interest rate unchanged at 2 per cent as expected and revised down its estimate for 2014 growth in gross domestic product to 1.5 per cent from the previous forecast of 2.7 per cent. But
Based on the new forecast, GDP in the first half of 2014 is expected to see a 0.5-per-cent contraction. Second-half GDP is expected by the MPC to grow by 3.4-3.5 per cent.
These forecasts are in line with ASP projections. We believe there will be no significant impact on estimates for listed companies’ 2014 earnings as ASP analysts cut their profit estimates previously on conservative assumptions.
This week, the situation in Iraq remains relatively high-risk as severe fighting could have several impacts. Oil prices will be affected directly.
Between August 2, 1990, and January 15, 1991, after Iraq invaded Kuwait, Nymex (New York Mercantile Exchange) oil prices soared over 30 per cent, while at the same time, the SET Index plunged by more than 48 per cent.
However, it is believed that this current situation will not have as severe an impact as the previous one, given that the Stock Exchange of Thailand contains a number of energy stocks benefiting from oil prices. Speculation in the energy sector is possible.
Stock picks: PTTEP (PTT Exploration and Production, fair value Bt195) and GUNKUL (Gunkul Engineering, FV@Bt20).
Another attractive industry is property development, as there are signs that it has bottomed out and will return to growth again. From April 2014, presales recovered, and this could prompt presales of 15 medium-sized and large firms that saw presales drop for the fifth consecutive quarter reach Bt37 billion in the first quarter. That quarter will be the low point of this year. Purchasing power is also returning along with the launch of new projects.
Another sign of recovery is income realisation from 2014 transfers of condominiums totalling Bt88.6 billion. In 1Q14, there was only Bt14.3 billion in realised income.
After this, there will be more than Bt21 billion in income to be realised per quarter and more than Bt30 billion in 4Q14. And this will mean 1Q14 performance is the lowest of the year, and recovery will be clearly seen from 2Q14.
Stock picks: AP (FV@Bt7.10), ANAN (Ananda Development, FV@Bt2.90), RML (Raimon Land, FV@Bt2.38) and SC (SC Asset, FV@Bt4.45).
With the SET Index at 1,460 points, the current price-to-earnings ratio stays at 15.5 times and PER at the end of 2014 will be 14.9 times. These are high, based on estimated EPS (earnings per share) growth for 2014 of 7.74 per cent.
If the SET Index’ PER stays above 15 times, a large amount of capital is required to flow in consistently to drive the gauge.
Under the current situation, no signs are found for such purchases from foreign investors. On the contrary, from 2009 to the present, foreign holdings of stocks plummeted from Bt320 billion to Bt39 billion, reflecting capital outflow. Thus the SET Index is expected to have limited upside at no more than 1,480 points. Investment strategy is to switch groups for investment, based on current news. Now, energy and property development are attractive.
Vice President, Research
Last week, the Stock Exchange of Thailand moved sideways.
Early in the week, the SET Index rose on the National Council for Peace and Order’s economic stimulus and cancellation of curfews across the nation.
Before staging recoveries late last week on the US Federal Reserve’s policy that supports risky asset investment, the stock market saw profit-taking from the middle of the week as, first, the central bank did not cut the policy rate for economic stimulus, and second, there were rumours that tax collection on capital gains were likely. LTF (long-term equity fund) cancellation was also included.
This week, we weight on China’s HSBC Flash PMI (Purchasing Mangers’ Index), which will be announced on June 23 today, and Thai export figures that may be announced next week.
Investors may forecast window-dressing at the end of the second quarter of 2014 that may occur in underperforming stocks like those in energy, petrochemical and refinery. In stocks that rose sharply, we expect risks to sales for locking profit at quarter-end.
We expect the SET Index at 1,440 points for stock accumulation.
Investment strategy: We weight on external plays that could gain from the expected recovery of the Chinese economy and recovery of such commodities as sailing, foods and agricultural products.
We focus on domestic plays with cheap valuations such as small banks and industrial estates.